All posts tagged Mario Draghi

Is the European equity market's huge rally of the summer justified? And, perhaps more importantly, is it likely to be sustained?

My view is “possibly” and “probably not”, in that order.

Spain's IBEX is up more than 25%, while Italy's FTSE MIB is just a shade under 24% higher from their end-July lows. Germany's DAX bottomed in early June, since when it has surged 18%. Overall, the Stoxx 600 index is up a little under 15% over that same period.

Most of those gains came directly as the result of European Central Bank President Mario Draghi's promise to do whatever is necessary to save the euro. The consensus reading has been that the promise means the ECB will buy bonds from the euro zone's beleaguered sovereigns in sufficient quantity to drive yields low enough that these governments will be able to fund themselves.

Sure enough, Italian and Spanish bond market yields dropped sharply and their equities soared.
Implicit in the equities market reaction was that a considerable amount of euro collapse was built into prices. Not only would an unwinding of the euro zone cause serious near term financial market trauma and economic slump–it's been estimated that economies would suffer considerably more than they did following the Lehman Brothers bankruptcy–but the benefits of monetary integration would be lost. So a decrease in those risks is clearly good for future profits.

Is this what Mario Draghi was so busy with that he couldn’t make it to Jackson Hole?

From our Margit Ferher:

The European Central Bank’s role to ensure price stability and a single monetary policy throughout the euro zone may at times require exceptional measures, ECB President Mario Draghi said Wednesday, in an article he wrote for German weekly Die Zeit and roughly a week before the ECB’s policy-setting council next meets.

“Yet it should be understood that fulfilling our mandate sometimes requires us to go beyond standard monetary policy tools,” Mr. Draghi wrote in the article published on the ECB’s website.

Draghi, the president of the European Central Bank, today said he’s skipping the Kansas City Fed’s annual Jackson Hole symposium, because of a “heavy workload.” That is a tea-leaf reader’s dream, and now, instead of mulling the will-he/won’t-he of Ben Bernanke’s keynote speech (Friday, 10 a.m. ET, incidentally), we can play a guessing game over the why’d-he of Draghi ditching Jackson Hole.

What’s a “heavy workload” mean? That excuse is wide enough to drive a Mack truck full of peripheral bonds through.You can read this latest news however you like. Are Europe’s leaders putting the finishing touches on an all-encompassing grand solution?

It’s impossible to know for sure, and whatever the consensus is today can change drastically between now and Sept. 6, when the ECB’s governing council holds its next meeting.

So we’d caution against reading too much into it.

The markets aren’t reading too much into it right now. European stocks are down, but euro’s higher, and Spain’s 10-year bond yield isn’t moving much, despite the news out of Spain.

And maybe Draghi really is just too busy. Europe remains on the verge of collapse. Reports today show that Spain’s recession is turning out worse than expected. If that wasn’t bad enough, the nation’s most indebted region, Catalonia, has requested about $6.3 billion in aid. Needless to say, Spain doesn’t have a spare $6.3 billion hanging around.

The August relief rally of European credit seems to be coming to an end as turmoil threatens to flare up around Greece yet again. The cost of credit default swaps on Italian and Spanish government and corporate debt surged last week as rhetoric between Greece and Germany grew more heated.

The cost of insuring $10 million of Italian five-year government bonds has risen 11% over the past four trading days to $440,000, while the price of protection on Spain is up 8% over the same time period, according to Markit. The price of swaps on Telecom Italia SpA bonds rose 14% last week, while protection on Spain’s Telefonica SA jumped 15%.

Bond prices also dipped last week but not to the same extent as more liquid credit default swaps. The yield of Spain’s five-year bonds rose 5% over the past five trading sessions, while Italian bond yields rose 3% last week, according to FactSet.

Spreads on Italian and Spanish CDSs began dropping in late July after European Central Bank President Mario Draghi pledged to do “whatever it takes to preserve the euro,” a comment some interpreted as a precursor to more government bond purchases by the bank. In subsequent weeks, the cost of protection on five-year Italian and Spanish sovereign bonds declined by about 30%.

Stephen Jen is a pronounced euro bear, but he gave a ringing endorsement of Mario Draghi’s new game plan for the euro zone’s debt crisis Thursday, even as markets were disappointed that the European Central Bank president delivered little.

U.S. stocks sold off while yields on 10-year government bonds in Spain and Italy rose as investors fretted over what many saw as Mr. Draghi’s failure to live up to his promise last week to do “whatever it takes” to preserve the euro.

Many investors had looked for Mr. Draghi to announce an immediate program of bond-buying for the sovereign debt of the euro zone’s biggest trouble spots. When all he unveiled was a set of guidelines for how governments would need to first meet tough preconditions before aid was forthcoming, many investors felt their hopes dashed and responded by hitting the sell button.

Not Mr. Jen, however. The managing partner at London-based hedge fund SLJ Macro Partners, and one of the world’s best-known currency strategists, applauded Mr. Draghi’s message as one that pressures euro-zone governments into reform and preserves the central bank’s independence.

“We all know [that] what the ECB might do will only buy time. Therefore, it is much better for Europe if the ECB could render help only on the condition of more actions from the governments,” Mr. Jen said in a telephone interview Thursday from his office in London.

You never can turn your back on a guy who’s got his finger on the button.

The Dow was down nearly 200 points earlier, as traders contended with their disappointment that neither the Fed’s Ben Bernanke nor the ECB’s Mario Draghi did anything concrete this week, albeit both moved closer to cranking up some new programs.

It wasn’t just the Dow that reacted, of course. The euro’s under $1.22, and the yield on the Spanish 10-year bond spiked back to 7%. The major U.S. indexes, the Dow, S&P 500 and Nasdaq Composite, were all down more than 1%. Some give-back isn’t surprising; after all, the Dow rose 400 points last Thursday and Friday on nothing more than Draghi’s jawboning.

Now August stretches out as a wide open, rough sea. The ECB and Fed aren’t set to meet again until September. The most important data point comes tomorrow with the jobs report. After that, the tide’s driving this boat.

Despite this week’s disappointments, though, stocks are taking it relatively well. The Dow’s narrowed its losses, as the markets are already re-calculating the QE odds. Ultimately, the central banks have only big moves left available to them, and traders can’t be sure the banks won’t pull that trigger. The markets know it, and the bankers know it. This is why jawboning is so effective.

Markets spun into reverse after it became clear that ECB President Mario Draghi — today, at least — wasn’t going to back up last week’s bold talk.

The ECB didn’t announce any new programs today, nor did it re-open any moribund programs. It left interest rates unchanged as well. After a rally last week predicated solely on jawboning and speculation, a splash of cold water is hitting the markets.

The euro was at $1.24 before the press conference; it’s around $1.2200 now. European stocks have slid into the red, and U.S. stocks are following them there. The Dow is down 100, the S&P 500′s down 11.

The yield on the U.S. 10-year Treasury is down to 1.48%; the yield on Spain’s 10-year is 6.90%.

The bottom line is that for all the talk, nothing is happening right now. The market’s don’t like that. Here’s a smattering of responses from the investor community:

Carl Weinberg, chief economist, High Frequency Economics: Once again, we have no commitment to action from the ECB, and no execution of promises previously made. Nothing seems set to happen now. Traders and investors who expected immediate action are, and should be, disappointed. President Draghi told governments that they have to live up to their commitments. That sentence was linked to a statement about how the governments must stand ready to activate EFSF. More scolding of governments, but no ECB action, is the bottom line.

Immediately following the market’s disappointment with the statement from the Federal Reserve, the dollar gained, but not in the usual way.

Typically market participants run to the so called “risk-off” trade, which is more often than not a buy-yen story.

This time, the market did buy yen, but not against the dollar. The yen buying came almost exclusively at the expense of the euro; EUR/JPY dropped immediately after the Fed statement, while the dollar gained broadly. The movements lead one to believe traders are losing a bit of the confidence they had in Mario Draghi riding to the rescue.

One by one, and meeting after meeting, central bankers are disappointing market participants reading the tea leaves. One more shoe to drop tomorrow and the sound it makes may be the loudest one of all.

ECB President Mario just gave the bulls the shot in the arm they’ve been hoping and praying for.

Speaking at a conference, Draghi said the ECB will do “whatever it takes” to prevent a collapse of the euro zone. Lately, investors have greeted these sort of comments skeptically, claiming this is more rhetoric that has been repeated time and again.

But this time may be different. Andrew Wilkinson, chief economic strategist at Miller Tabak, explains:

Draghi’s words carry a great deal of weight because he has in the past refused to fill in where governments fail, recognizing the futility of sticking a finger in the dyke. Clearly he remains of the position that the broad swathe of measures undertaken by the region’s governments are heading in the right direction and that the red flags hoisted by untrusting investors recently are unwarranted.

It’s a volatile day already, with a lot of news out there and markets erratic after three major central banks took easing measures, some better-than-expected jobs data, warnings from the ECB’s Mario Draghi, and German Chancellor Angela Merkel sounding like she’s trying to back off the purported “deal” at last week’s summit.

Let’s try to make sense of all this. The upshot of all this appears to be that central bankers are worried about their economies being weak. That’s no surprise to anybody who lives in the real world, but it’s apparently a surprise in some quarters.

U.S. stock futures are dropping, with Dow futures down 55. Better-than-expected weekly jobless claims and the ADP report aren’t having much of an effect.

We’d imagine the comments from Draghi at this press conference are the main catalyst. Among the flood of headlines crossing the Tape, this one stands out: “Draghi: Downside Risk To Growth Outlook Has Materialized.” We didn’t know Europe actually had a growth outlook, but no matter.

Politicians on both sides of the Atlantic have gotten a tongue-lashing from the most powerful bankers in the world the last two days. Being central bankers, the tongue lashings were more measured, more polite, not of John Tortorella level of brutal honesty.

But they were clear about one thing: People elected to lead must do just that. Now.

Fed Chairman Ben Bernanke made it clear this morning: the so-called fiscal cliff facing the nation at the end of year — a combination of policy expirations that could dump the economy back into recession — must be addressed. He didn’t tell Congress what to do, “I’m wise enough not to do that,” he said, but he was firm. “If you all go on vacation, it’s still going to happen,” he said.

ECB President Mario Draghi was just as stark in his press conference yesterday. “The ball is in the court of political players. It’s not for the ECB to fill this vacuum,” he said.

A vacuum is exactly what it is, too. A leadership vacuum. Europe’s crisis is at the doorstep; the U.S. “fiscal cliff” lies a few months down the road. Both have the potential to unravel a shaky global economy. Both can be neutralized by the political classes, but the classes have been paralyzed.

As expected, the European Central Bank kept rates unchanged and didn’t offer any radical plans to boost the euro zone. Market prognosticators are already predicting what’s going to happen next.

In his press conference, ECB President Mario Draghi acknowledged the interbank market, where banks borrow short-term funds or lend out surplus desposits, are becoming more stressed. But an interest-rate cut now wouldn’t do much to alleviate that problem. Additionally the ECB made small downward cuts to its growth forecasts, but again, they weren’t enough to spur new initiatives.

Draghi’s comments and body language gave the impression of “a poker player who keeps his cards close to his chest,” says Brussels-based ING economist Carsten Brzeski in a note.

“Listening to the ECB’s macro-economic assessment was a bit like listening to whistles in the dark,” Brzeski says. “It looks as if they are becoming increasingly worried, but do not want to show it.”

Mario Draghi has learned much from the Germans, as he is proving by once again spraying cold water on everybody’s hopes for an immediate cash bonanza from the ECB.

Draghi, talking to the European Parliamentary Commission this morning, has produced the following series of Dow Jones Newswires headlines, which do not exactly ring with the sound of soaring Money Helicopters:

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